Will Closed Loop Fund appeal be limited by loans?

Tue, 06/10/2014 - 12:14 | jaderhianna

Will Closed Loop Fund appeal be limited by loans?

By Dan Leif, Resource Recycling

June 11, 2014

The $100 million Closed Loop Fund made ripples throughout the recycling industry when it was announced by a team of corporate giants this spring. What remains to be seen, however, is how attractive the effort's loan structure will be to actual municipalities.

The Closed Loop Fund, which is backed by Walmart, Coca-Cola and a handful of other multinational enterprises, was launched in April and has billed itself as a major corporate response to stagnant American recycling rates. "The goal is to divert valuable raw materials from landfill by helping to provide 100 percent of U.S. consumers access to recycling where and when they need it," the Closed Loop Fund states in an informational brochure it created for stakeholders.

The engine for achieving this? Zero interest loans that will be available to communities so that they can have funding available for bin-to-cart transitions, resident outreach initiatives, facility construction and other projects. In the past when recycling coordinators needed funding outside allocated budgets for those kind of efforts, they turned to municipal bonds as well as grants from state or federal government or nonprofit groups that had corporate backing.

The Closed Loop Fund and its loan strategy offers a very different approach. But some municipal representatives say that being on the hook for repayment simply is not an option for their communities.

"If the elected officials here were going to take on debt, it wouldn't be for recycling," James Jackson, director of public works for Richmond, Virginia, told Resource Recycling.

He noted that his city is in fact looking for a way to move more residents from recycling bins to carts but that Richmond leaders are only willing to make debt commitments to fund the highest priority projects. "We have assessed our needs for road maintenance and have identified well over $230 million worth of road improvement needs just to get us at a place where 80 percent of our roads are at rating of good or better," Jackson said. "That makes it difficult for us to say we want to participate in a zero interest loan program for recycling."

However, other leaders say the zero interest play could work for some communities — especially if the loans come in concert with grants or other financial mechanisms.

Some industry members have indicated a loan would be attractive in stuations where there were already plans to spend a large sum to transition from bins to carts over several years. A loan could allow a community to step away from that staggered structure and make the transition in a single leap.

Scott Mouw, state recycling director at North Carolina Division of Environmental Assistance and Outreach, laid out a slightly different scenario he could see happening in many city council meetings in the coming years: "If the recycling staff walks in and says, 'We need $3 million for carts and this group of industry players is willing to give us a $400,000 grant toward that end and for the rest of it we can get a zero percent loan,' that would be a much easier thing for the City Council to say yes to."

In an interview with Resource Recycling, Closed Loop Fund CEO Ron Gonen said such situations are exactly what his group is seeking. "That's our sweet spot," he said. "We don't want to be the sole source of capital for a city."

He added the Closed Loop Fund, which has not actively started seeking municipal partners yet, views itself as a player that will provide loans of between $1 million and $20 million to fund major initiatives. Ideally, he said, smaller organizations will work to provide grants and other funding alongside the loans. And he said the Closed Loop Fund itself has plans for a grant arm, though the sums flowing out of that part of the initiative will be far smaller than the primary loans.

In communication materials the Closed Loop Fund has issued thus far, it has argued that convincing municipal leaders to embrace loans won't be a difficult sell once those leaders calculate the financial gains loan-based improvements will spark. In its brochure, the Fund notes several examples of how a community could leverage its loans and shows the overall revenue gains those example-cities would see as recycling diversion goes up and landfill tip fees go down.

The Fund's logic dictates that as municipalities start reducing their trash costs and increasing commodity revenue, they'll see loans not as a hindrance but as a long-term investment opportunity.

However, individuals who have experience helping communities devise strategies to lift recycling infrastructure say the cost-savings argument only goes so far when it comes to how cities think about loan payback.

"In our experience communities are going to look at their budgets more holistically," Mouw said. "They're going to look at their loan portfolio and find ways to pay loans they have. But they are unlikely to tie the payback to a specific kind of savings or revenue source. All the money tends to go to the same pool."

But Gonen said the early interest among municipalities indicates there are plenty that feel confident a loan play will work for them. "If there aren't any cities in America that are interested in $100 million in zero interest loans to invest in their recycling programs, that's OK," he said. "However, I can tell you there's way more demand than that just in terms of the calls and emails we've gotten from folks. It's very attractive to cities to be able to borrow at zero interest and have the repayment tied to diversion savings and commodity revenue."